Section 80M

Finance Act of 2020 introduced Section 80M within the framework of the Income Tax Act of 1961 to simplify procedures for businesses.This section aims to reduce the tax and compliance burdens that corporations face. It's designed to help companies manage their taxes more efficiently and with less hassle ultimately supporting economic growth by making the tax system smoother and more manageable for businesses.

What Is Section 80M Of The Income Tax Act?

Finance Act of 2020 includes a series of policies and reforms aimed at bolstering economic growth and streamlining tax administration. Among these reforms is the introduction of section 80M within Income Tax Act of 1961. This particular provision is intended to alleviate the tax and compliance burdens on corporate entities. By implementing section 80M government aims to simplify tax regime for businesses thereby facilitating easier compliance with tax regulations and reducing overall administrative burdens. It's designed to help companies manage their taxes more efficiently and with less hassle ultimately supporting economic growth by making the tax system smoother and more manageable for businesses.

Who Is Eligible To Claim Benefits Under Section 80M?

Section 80M of Income Tax Act applies to Indian companies that both receive and pay dividends. If a company receives dividends from another Indian company and then pays out dividends to its own shareholders it can get a tax deduction. This deduction is allowed for the amount of dividends received provided the company pays out those dividends to its shareholders at least one month before the due date for filing its income tax return. This rule is in effect for dividends distributed on or after April 1, 2020 starting from the assessment year 2021-22.

What Types Of Income Are Covered Under Section 80M?

Section 80M of Income Tax Act allows a domestic company to reduce its taxable income by the amount of dividends it receives from its subsidiary company. If a domestic company receives dividends from a subsidiary it can subtract that amount from its total income before calculating its taxes. The deduction is capped at the amount of dividend received ensuring the company can only deduct income up to this limit. This provision is intended to prevent double taxation on the same income as it would otherwise be taxed both in the hands of the subsidiary company and the parent company. Therefore, by using Section 80M a domestic company can lower its tax liability reflecting the received dividends as a deductible amount from its total income.

Deductions Claim Under Section 80M

To be eligible for a deduction under Section 80M the following criteria must be met.

1. Domestic company must own more than 50% of the voting shares in the subsidiary company.
2. Dividend must be counted as part of the domestic company's total income.
3. Dividend must be received on or after April 1.
4. Domestic company must be privately held meaning the public doesn't own its shares.
5. Subsidiary company must have paid taxes on its profits.
6. Domestic company must provide a declaration to the subsidiary, confirming it meets all these conditions as per Section 80M.
7. Deduction is allowed if the recipient domestic company redistributes the dividends to its shareholders.

Documentation Requirements For Claiming Deductions Under Section 80M

To claim deductions under Section 80M Income Tax Act 1961, which pertains to dividends received from domestic companies certain documentation and information are required.

1. You must receive dividends from domestic companies to qualify. You need to have received dividends from domestic companies. Ensure you have documentation proving the receipt and the amount of dividends.

2. If claiming deductions on investments made from the dividend income such as in specified assets or entities you should maintain proof of these investments. This can include statements or certificates from mutual funds, specified securities, etc.

3. Calculate the deduction amount accurately based on the provisions under Section 80M. This involves knowing the eligible deduction amount and the applicable rules.

4. Details related to claiming deductions under Section 80M are required to be submitted while filing your income tax return. Ensure all necessary forms such as ITR forms are correctly filled out and submitted along with supporting documents.

5. Keep bank statements or other proof of transactions related to dividend receipts and investments made from such dividends.

6. In some cases statements or certificates from the companies declaring the dividends might be required to validate the receipt of dividends.

Procedure For Computing Deduction Under Section 80M

A a domestic company received a dividend of Rs. 10 lakhs from Y another domestic company. B is fully owned by A. This transaction occurred during the previous year 2021-22. On 15th May 2022, A. declared and distributed a dividend of Rs. 5 lakhs.

According to Section 80M A can get a deduction on the dividend received from B. Deduction amount is capped at the lower of the dividends received or the dividends distributed by the company. In this case A. received Rs. 10 lakhs but only distributed Rs. 5 lakhs. Therefore A. can claim a deduction of Rs. 5 lakhs under Section 80M.

Conclusion

The way dividends are taxed has changed. Now instead of the company paying the tax on the dividends it gives out, the person who gets the dividends has to pay the tax. This helps to avoid taxing the same money twice. Before there was a flat tax rate on dividends which didn't consider how much tax the recipient should actually pay based on their income. Now the tax on dividends will be based on the recipient's own tax rate making it fairer.